COMMENT

Ireland, Greece: brothers in arms?

By Jens Bastian

The past week provided two very different expressions of citizens? frustrations in Greece and Ireland, the two members of the European Union at the forefront of the year-long sovereign debt crisis in the eurozone. While Irish voters in Dublin, Cork and Limerick went to the polls, Greek citizens in Athens, Thessaloniki and Patra vented their anger by staging a week of industrial action, culminating in Wednesday?s 24-hour nationwide general strike. While people voted with their hands in one country, citizen exercised their rights with their feet and fists in the other.

In Dublin, we will now see a new government taking office. The results of the general election on Friday could not have been any clearer. More than 70 percent of the electorate cast ballots and the outcome swept the ruling coalition from power. It was the first defeat for a eurozone government since the onset of the debt crisis. The change of power in the new Dublin parliament, the Dail, produced the biggest swing in Irish politics since 1932. It?s nothing short of a democratic revolution achieved at the ballot box.

After 14 years in power, the center-right Fianna Fail has to digest its worst defeat in history. In Dublin it only won one out of 47 available seats. The anger toward the governing coalition was widespread and unrepentant. It also affected the junior partner in government, the Green Party, which lost all of its six seats and will not return to parliament.

The electoral tsunami underlines how comprehensively both parties were blamed for the property and banking crash of the past two years, leading to the humiliating IMF-EU bailout in December 2010.

The new governing coalition parties of Fine Gael (right-of-center) and Labour have a large majority in parliament. They now face the daunting task of trying to combine a renegotiation of the terms of the EU-IMF bailout with the implementation of the harsh budgetary measures needed to confront the fiscal crisis, banking sector liabilities and a deepening economic recession.

The reaction of Greeks

In contrast, the overriding majority of citizens in Greece went about their normal business and sought to get to work, despite the disruptions caused by the numerous strikes in public services and transportation. The first general strike of the year against the government?s austerity policies was a familiar replay of the events and paralysis that the previous five general strikes created during 2010. Yet again, journalists joined the walkout, forcing Greeks to turn to foreign media in order to learn about domestic affairs.

Over the course of the past months, the number of participants in demonstrations on the streets of Athens has been constantly shrinking. Meanwhile, the level of violence displayed during these rallies by a minority mob seeking to highjack them continues to be an all too familiar scene. The cause of those citizens demonstrating is not helped in the least by thugs who project an image of defiant Greece that tacitly supports violence to an international audience.

Exasperation with cuts to their income, allowances and pensions -- in particular in the public sector -- characterizes many citizens? anger in both Greece and Ireland. This legitimate perception is based on two key assumptions that the George Papandreou government in Athens and the new coalition in Dublin have to confront. In both countries there is a pervasive feeling among most citizens that they are caught in the cogs of larger economic forces and financial players.

Neither country wants to be seen simply as taking orders from the EU or IMF. It is difficult enough for the Irish to come to terms with the steep fall from surging Celtic Tiger to class bad-boy. In both countries, the precipitous fall from prosperity to ruin has not yet reached its conclusion.

Under these circumstances we should not underestimate the fact that a change-resistant culture is alive and kicking in both countries. Resistance to structural reform is particularly strong where entrenched interests are being challenged.

Opening up so-called closed professions in Greece through legislative changes, a myriad of groups including pharmacists, lorry drivers and lawyers, continues to be resisted, including by members of Parliament across political divides, among which are many lawyers, notaries and other representatives of these liberal professions.

In Ireland, the single issue that unites both members of the outgoing government and the victorious opposition parties is defending the country?s pro-business corporate tax rate. This grand coalition in Dublin will fight ?tooth and nail? to safeguard the 12.5 percent rate as non-negotiable against the perceived predators from Berlin, Paris and Brussels, who are seeking an increase in a corporate rate that is half the European Union?s average.

The corporate tax rate in Greece, currently at 25 percent, is due to fall to 20 percent in incremental steps by 2014. But this is where the commonalities between the two countries end.

In the Greek case, resisting change and watering down legislative initiatives to open up closed professions is a means to keep competition out of these sectors, prevent innovation from gaining ground and to safeguard the special interests of organized minorities.

In contrast, as controversial as the 12.5 percent Irish corporate tax rate has become for other countries in the EU, over the past decade the tax option has been used to attract investment from companies such as Google, Microsoft Corp, Dell computers, the drug producer Pfizer and financial sector firms from as far away as Hong Kong. Even firms from countries whose governments are opposed to the low corporate rate have numerous subsidiaries across the island -- for example, 250 German companies operate in Ireland.

Geography is one reason that prevents Ireland and Greece, at the continent?s opposite ends, to be the first port of call for overseas investment. But both countries have taken different paths to mitigate this constraint. Public expenditure, fiscal deficits and corporate tax rates increased in Greece during the past decade. In the Irish case, until 2010, the country showcased itself as the ?Celtic Tiger? and EU poster child as regards budget deficits, public debt levels and low corporate tax rates.

Both countries are now seeking to confront their mountain of problems in consumer spending and challenges arising from government austerity measures by supporting an export-driven economic recovery. Reducing the current account deficit in Greece and improving the country?s export capacity is a major external anchor toward escaping from its worst recession on record. In the case of Ireland, it is less about regaining overseas sales then retaining high export volumes.

Export-led growth

The recovery prospects in both countries thus face huge domestic constraints and critically depend on defining an economic agenda based on export-led growth.

But in terms of foreign direct investment, export-focused companies and ease of doing business, Ireland is in a much better position than Greece. In the frontline politics of corporate taxation, including adherence to tax codes and combating tax evasion, Dublin?s point of departure relative to Athens?s is much more advantageous and appears sustainable over time.

By contrast, the policies of sectoral and professional liberalization in Greece have yet to reach their culmination, let alone unleash the competitive potential of such industries. Until this structural reform process translates into feasible gains in the real economy across Greece, Ireland will continue to be some distance ahead.

In this context, it is not necessarily essential for Ireland to successfully defend the current corporate tax rate. What the controversy with other EU competitors highlights is not so much how low or high rates should be, but the absence of a common, converging tax base across the European continent. The Irish corporate tax rate debate has, in fact, opened up a window of opportunity to discuss more broadly in what kind of tax regime the EU 27 and the eurozone?s 17 members want to conduct business in the future.

Competitiveness pact

The recent Franco-German proposal for a competitiveness pact includes the harmonization of Europe?s corporate tax base. Furthermore, the EU Commission in Brussels has tabled a plan in which companies would pay taxes in the countries where they make sales rather than where they are based and registered. Such a proposition, if adopted, would immediately and adversely affect Ireland.

In both cases, there is a rocky road ahead to travel. The Papandreou government in Athens and the incoming coalition government in Dublin have to grapple with the political acceptability of harsh austerity programs. Moreover, they must ensure their legitimacy over time, despite the measures being perceived as unfair by large parts of society in Ireland and Greece.

But Ireland may now have an advantage, which will be closely followed in Greece. As the new government takes office and seeks to renegotiate the terms and conditions of the EU-IMF bailout package, it shall discover how much leverage it has at its disposal and what flexibility the two funding institutions are willing to display. Particularly the portion of financial assistance that comes from the European Union is a major bone of contention in Dublin. The loans carry an interest rate of 5.83 percent far higher than what Greece, in similar dire straits, is currently being charged.

In that respect both countries are brothers in arms. They need greater flexibility in the conditions of financial rescue arrangements that many feel are more of a burden than a rescue package. The risks are high, including unilateral insolvency or joint default.

The course of events in Dublin and Athens is difficult to predict. Both countries will remain at the forefront of attention when charting their reform trajectories and seeking broader solutions to the ongoing eurozone crisis. The major difference between Greece and Ireland on the one side and remaining members of the eurozone on the other is that citizens in Athens and Dublin understand the distress caused by what is happening to them. Their peers in Portugal, Italy, Spain and elsewhere across the continent may find out sooner rather than later what that feels like.

* Jens Bastian is a Visiting Fellow for Southeast Europe at the University of Oxford?s St Antony?s College.

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